Australia trending in the right direction
The Australian market was encouraged by better than expected inflation and employment figures last month. RBA Governor, Philip Lowe also stated that the economic recovery was playing out faster than what was initially anticipated and that GDP was now expected to return to its pre-pandemic level by mid-2021. All very positive! However, this hopeful outlook is largely dependent on a successful vaccine rollout, which is set to commence in February.
The Blue Wave
It might be a new year, but US politics still dominated the headlines in January. The storming of the Capitol Building during the certification of Joe Biden’s victory was a disturbing low point. Although perhaps of greater significance, at least from a market perspective, was the shock result out of Georgia, where the Democrats won both available seats in the crucial run-off elections, effectively giving them control of the Senate.
This result has massive implications for Joe Biden’s legislative ambitions and now gives him greater scope to push ahead with his policy agenda. Wasting little time, Biden has already proposed a 1.9 trillion-dollar American Rescue Plan, designed to boost the economy until the COVID-19 vaccine is widely available.
It’s also expected that he will eventually push for higher taxes, on both companies and high-income earners, greater anti-trust regulation in the dominant tech space and stronger action in relation to climate control. While each of these measures are likely to have a significant impact across various sectors, the markets primary focus to date has been on the stimulus package and the anticipated shift to a greener economy.
The Reddit sub-channel “WallStreetBets” gained a remarkable amount of attention last month. The six-million-strong community-directed buying into numerous unloved US companies that had been heavily shorted (or backed to decrease in value) by several large hedge funds.
The herding tactics proved successful, initially, as the prices for companies such as GameStop skyrocketed. Volumes and volatility also surged, and multiple trading platforms were forced to impose trading limits on certain securities.
While there will always be a gravitational pull towards opportunistic “get-rich-quick” strategies, such as these, it’s important to acknowledge that such investments are highly speculative, rarely involve much fundamental sense and are often short-lived. At the time of writing, GameStop had already fallen 85% from its peak last month.
Share market valuations
Another topic that’s been widely discussed in various January market updates is the possibility of an imminent pullback in the share market. The extended rally following the March COVID-19 lows has driven traditional valuation measures, like the price to earnings ratio, to well above average levels. Generating fresh concerns that the share market has become overvalued or expensive.